credit cards - harvard law school...2016/01/20 · credit card caution a means for buying something...
TRANSCRIPT
Credit Cards Tips for Successful Management
Objectives
By the end of this presentation you should be able to: Know what to look for in good credit cards …and what to avoid Understand credit card terms Know how your card limit is decided Know how to use credit cards responsibly
Managing Money
Most people
will spend more with credit than debit and
more with debit than cash.
Credit Card Caution
A means for buying something you don’t need, at a price you can’t afford, with money you don’t have.
Credit Card \kred’-et kard\ n.:
Cost of Credit Card Making Only the Minimum Payment
Making only minimum monthly payment will take years to payoff balance (assuming no new borrowing)
$2,000 balance • 18% interest rate • minimum payment • Over 30 years to payoff • $7,000 total paid
Add $50/ month to payment
Credit Card Advantages
Advantages: Convenient Record Keeping Perks/Rewards Build Positive Credit History Purchase Protection
Disadvantages: Overuse High-cost fees Hidden fees Interest Debt
Presenter
Presentation Notes
Convenience--Credit cards can save you time and trouble--no searching for an ATM or keeping cash on-hand. Record keeping--Credit card statements can help you track your expenses. Some cards even provide year-end summaries that really help out at tax time. Perks--From frequent flier miles to discounts on automobiles, there is a program out there for everyone. Many credit card companies offer incentive programs based on the amount of purchases you make. Build positive credit--Controlled use of a credit card can help you establish credit for the first time or rebuild credit if you've had problems in the past--as long as you stay within your means and pay your bills on time. Purchase protection--Most credit card companies will handle disputes for you. If a merchant won't take back a defective product, check with your credit card company.
Good Credit Card Habits
1. Make payments on time 2. Pay more than the minimum 3. Read your card agreement and other materials carefully 4. Check monthly statements for accuracy 5. Stay below your credit limit 6. Report a lost or stolen card immediately
Presenter
Presentation Notes
Using Credit Cards Responsibly Whether you use your credit card to buy a computer or a cook book, good credit habits are essential to building and protecting your credit history. A credit card can be a valuable tool if it is used responsibly: They offer convenience and flexibility—allowing you to buy now and pay later, either by paying in full the end of a billing period or by making payments over time. They can help you build a solid credit history—essential when you apply for a car or home loan. They can provide peace of mind—knowing that you have access to money in case of an emergency. They have also become essential to making certain kinds of purchases and plans—for instance if you want to reserve a hotel room or rent a car you usually need to use a debit or credit card to complete the transaction. In order to maintain the ability to have a credit card (and your good credit) you must use it responsibly. Responsible credit card use means doing the following: Make payments on time Make it a priority to pay your bill on time, every time. If you are late or miss a payment, your account will accrue late fees and additional finance charges. Late and missed payments show up on your credit report, and can significantly lower your credit score. Pay more than the minimum Your monthly credit card bill should include information about how long it will take you to pay off your balance if you only make minimum payments. Take note of how much money you can save by paying more than the minimum each month. Read your card agreement and other materials carefully When you open a new credit card account, read the cardholder agreement thoroughly. Credit card companies will also send you notices called “changes in terms” 45 days in advance of making changes to the fees, interest rate and other important information about your card. Reading these notices can help you decide whether or not you want to change the way you use the card. Check monthly statements for accuracy Mistakes can and do happen. You can help protect your credit by checking your statements carefully either online or as soon as they arrive in the mail. If you find an error on your bill, call your credit card issuer right away to let them know. Stay below your credit limit “Maxing out” your credit card, or carrying a balance that exceeds 70–75 percent of your credit limit, appears as a warning sign on your credit report and could harm your credit score. It’s important to know your credit limit, and stay well within it. If you want your credit card company to allow transactions that would take you over your credit limit, you must let them know by opting-in to overdraft protection for your card. Otherwise, if a transaction would take you over your limit, it may be turned down. If you do choose to allow transactions that would take you over your credit limit, your credit card company can impose one fee per billing cycle. You can revoke your opt-in choice at any time. Report a lost or stolen card immediately If your credit card is used without your permission, you can be held responsible for up to $50 (although many credit card issuers offer $0 fraud liability). However, if you report the loss before the card is used, you won’t be held responsible for any unauthorized charges. To minimize your liability, report a loss as soon as possible. Most credit card issuers have 24-hour toll-free telephone numbers to accept emergency information. It’s a good idea to follow-up with a letter: include your account number, the date you noticed your card missing, and the date you reported the loss and keep a copy of the letter for your files.
Choosing a Credit Card
What to look for: Annual Fee Annual Percentage
Rate (APR) Credit Limit Grace period Minimum Payment Rewards
Fees, fees, fees…
• Balance transfers • Late payment • Cash advance • Foreign Exchange • Late Payment • Over-the-limit • Returned Payment
Presenter
Presentation Notes
Understanding Credit Card Terms Understanding key credit card terms will help you manage your account. Here are the key things you need to know. Annual fee This charge may be billed to your account as a fee for owning the credit cards. Some cards waive the fee for the first year and other cards have no annual fee. Annual Percentage Rate The Annual Percentage Rate (APR) is the finance charge or interest rate you pay on purchases when you choose to carry a balance on your credit card. It’s calculated as a yearly rate, so if you want to know what percentage you would pay each month in interest, divide the APR by 12 months. If you have an APR of 24 percent, the monthly finance charge is two percent. Take note of whether APR is a variable or non-variable rate. The interest rate on a card with a variable rate can fluctuate up and down, and is tied to an index, such as the prime rate. With a non-variable rate card, the APR is more predictable but can be increased by the issuer after you have had your credit card for one full year. In general, increases to your interest rate will only apply to future purchases, not your existing balance. But, the APR on your existing balance could increase if: You are more than 60 days late in paying your bill You are in a workout agreement and you don’t make your payments as agreed An introductory rate (also called a teaser rate) is a temporary interest rate that will last for at least the first six months that you have the card. It’s important to know what the new “go to” rate will be when the introductory rate ends. If you are planning on transferring a balance from another card or you think you will need to use a cash advance, make note of the APR, for these transactions, which might be different from the interest rate for purchases made with the card. Calculating interest and finance charges If you're going to carry a balance on your card, you should understand how the finance charge is calculated. The two most common methods for calculating finance charges are: Average Daily Balance—In this commonly used method, the company tracks your daily balance day-by-day, adding charges and subtracting payments as they occur. At the end of the billing period, the resulting daily balances are added together. Then, the total is divided by the number of days in the billing period to get the “average daily balance.”� Adjusted Balance—To figure the balance due, the company subtracts payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the current billing period aren’t included in the adjusted balance. This method gives you until the end of the billing period to pay your balance and avoid the interest charges. Cash advance A cash advance is not a regular credit card charge. A cash advance allows you to withdraw cash from an ATM, bank or by using checks given to you by the issuer for use when paying with your card is not an option. Be aware that while a cash advance may be useful in an emergency, it is usually expensive. You may be required to pay a transaction fee as well as finance charges. Credit limit Your credit limit is the maximum amount the credit card company allows you to charge on your credit card. How much money a credit card issuer will let you borrow depends on several factors, including your credit history. Your limit could be anywhere from a few hundred dollars to tens of thousands of dollars. After you have demonstrated a responsible payment history, you may request that your credit card company raise your credit limit. It’s a good idea to keep your balance well below the credit limit if you can. Your credit score will be best if you keep purchases below 25 percent of your total credit limit. Worried About Going Over-the-Limit? Take Note:�You must tell your credit card company if you want to allow transactions that will take you over your credit limit – called “opting-in to overdraft protection.” If you choose not to opt-in, your transaction will be denied if you attempt to make a purchase that would take you over your credit limit, but you will not be charged a fee. If you do opt-in to overdraft protection, your credit card company can impose one fee per billing cycle for transactions that take you over your credit limit. You can revoke your opt-in at any time. Fees You will probably have some fees associated with your credit card. The most common credit card fees include: Balance transfer fees—a fee for transferring the existing balance from another card, usually calculated as a percentage of the balance being transferred Cash advance fees—a fee charged as a percentage of the cash advance Foreign exchange fee—a fee charged by some companies for purchases made outside of the U.S. Most issuers also charge certain “penalty” fees. The good news is that all of these fees are avoidable if you carefully manage your account (for example, pay your bills on time, and don’t exceed your limit). Late payment fees Over-the-limit fees Returned payment fee Grace period A grace period lets you avoid finance charges if you pay your balance in full before the date your bill is due. A grace period is not an extension of your payment due date. Minimum payment The minimum payment is the smallest amount of your balance you can pay by the due date and still meet the terms of your card agreement. The minimum payment is just that—a minimum. If possible, try to pay more than the minimum. You will have to pay interest on any remaining balance you don't pay, so the larger the payment you make on your card the lower your interest/finances charges will be. Rewards With rewards cards, as you use your card, you accumulate points that can be used for different benefits such as travel, gift cards, cash back, direct application of earnings to your bill or balance, or even to make charitable donations. What to Look For: Look for a reward program that offers flexibility, such as cash or travel, and rewards you'll actually use. Make sure the rewards are easily earned and redeemed. Be mindful of various restrictions that come with some programs. Take note of whether rewards expire, and if there are limits regarding how many points you can earn. Make sure the other core terms of the card are the best you can get—compare interest rates, fees, and credit limits to make sure that the rewards are worth the costs associated with the card. If you qualify for a rewards card, it is important to shop around to find the rewards that you find most useful or valuable. And, it’s equally important to find those rewards on a card that has an interest rate, credit line, fees, and other terms that best fit your financial needs.
Annual Percentage Rate (APR)
the price you pay for borrowing money typically stated as a yearly rate
Annual Percentage Rate (APR) for Purchases For most credit cards, you can avoid paying interest on purchases if you pay your balance in full by the due date each month APR for Balance Transfers
you CANNOT avoid paying interest on Balance Transfers
APR for Cash Advances you CANNOT avoid paying interest on Cash Advances
Penalty APR and When It Applies
Credit Card Limit
The maximum amount a credit card company will allow someone to charge on a single card.
The limit varies by individual, and is usually based on a number of factors including: credit history Income previous credit behavior
Why your credit limit matters: Good for large purchases. It will impact your credit utilization ratio. It will impact credit score.
Presenter
Presentation Notes
Most credit cards have limits. When using any credit card, you should be aware of where your limit is and how close you are charging to it. If you charge above that limit, creditors can charge you additional fees, reduce your limit or even decline new charges. But beyond that, exceeding your credit limit can also impact your credit score. What exactly is a credit card limit? Simply put: a credit card limit refers to the maximum amount a credit card company or financial institution will allow someone to borrow on a single card. The credit card limit typically varies by individual, and is usually based on a number of factors including credit history, income, and previous credit behavior. Credit card lenders may also set your limit based on other factors, such as the limits on your other credit cards, company policies, or special offers. Why your credit limit matters If you are not planning on making a large purchase using your credit card, you may wonder why you need a card with a $5,000 or $10,000 credit limit. Even if you only plan to use a credit card occasionally, the credit limit matters because that will impact your credit utilization ratio—the amount of credit available to you vs. the amount that you use. This ratio varies by credit scoring model, but typically ranges between 30 to 35 percent. Using all of your available credit may impact your borrowing history and your credit score because your credit utilization ratio accounts for 30 percent of your Equifax credit score. For example, if you have a credit card with a credit limit of $1,500, charging a $500 plane ticket on your credit card will impact your credit utilization ratio more than if you if have a higher limit. Therefore, the lower your limit, the lower you may want to keep your balances. Calculating your credit utilization ratio In order to calculate your overall credit utilization ratio, add up all the credit limits on your open credit card accounts. Next, add up all the debt you owe on these accounts. Finally, divide your total debt by your total credit limit to obtain your credit utilization ratio. For example, let’s say you have two credit cards, one with a limit of $500 and the other with a limit of $1,500. That means your total available credit is $2,000. Now let’s say you have a balance on the first card of $100 and a balance of $1,000 on the second card. The total you owe is $1,100, which is 55 percent of your total available credit. That is your credit utilization ratio. Checking up on your credit habits Here are a few ways that could help you move toward a healthy credit utilization ratio. 1. Keep an eye on your credit card accounts.�The simplest way to keep track of your spending is to regularly check your credit card balances. It’s also a good habit to periodically review your statement for errors that may have impacted your balances. 2. Create balance alerts.�Many credit cards offer consumers the ability to sign up for text message or email alerts that will send notifications when you’re getting close to your available credit limit. 3. Pay your credit card bill more often.�If you need to use a larger amount of credit than usual, you may want consider paying off your credit card more than once in a month in order to keep your debt low. If you are paid twice-monthly, it may be wise to also pay your credit card bill on each payday. Payment history is a significant factor in determining your credit score, so try to avoid late payments. By paying your credit card accounts more often, you increase the likelihood that you will pay your bills on time and keep your credit utilization ratio in check. 4. Evaluate your accounts.�If you have old credit cards, you may want to consult a financial professional to see what you should do with them. Closing an account may decrease your overall credit limit and therefore increase your credit utilization ratio. Your credit score also factors in the length of credit history, and closing an older account could have an effect on this factor. The credit limits on your accounts can make a difference in your overall credit profile. Take the time to review your credit utilization ratio regularly so that you know where you stand, and try to stay within the recommended limit for credit utilization, because your credit card limit is a factor in your credit profile. Diane Moogalian is vice president of operations for Equifax Personal Information Solutions. Prior to joining Equifax in 2007, Diane held several strategic roles with leading financial services companies. http://blog.equifax.com/credit/how-your-credit-card-limit-is-decided-and-why-it-matters/
Balance Transfer
The process of moving an unpaid credit card debt from one card to another. It can be a tool to save some money. If you have a high balance with a 21% APR, you may be able to
transfer that debt to a credit card with a lower rate, saving you money on interest—and possibly helping you pay down your debt faster.
BEWARE! balance transfer fees are typically 3% to 5%
Cash Advance Fee
Using a credit card to obtain cash (e.g. at ATM) fee can be stated in terms of a flat per-transaction fee
or a percentage of the amount of the cash advance. For example, the fee may be expressed as follows: "2%/$10." This
means that the cash advance fee will be the greater of 2 percent of the cash advance amount or $10.
Minimum Payment
The lowest amount of money that you are required to pay on your credit card statement each month. Usually this amount comes to 2 percent of the outstanding
balance. Read your terms and conditions to see how your credit card's
minimum payment is calculated If you do not pay, any or all of the following could occur:
• Missed Payment is sent to credit bureaus • Assessed a late payment fee ($25-35) • Collections
Credit Cards Recap
Before obtaining a credit card: Read your card agreement and other materials carefully
Make payments on time Pay the full balance due each month Check monthly statements for accuracy Keep credit utilization low (balance to credit limit below 30-35%)
Report a lost or stolen card immediately
…next up?
Friday’s program will cover how to: Boost retirement savings Manage an investment portfolio